<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended Commission File Number:
April 30, 1997 0-21486
HARRY'S FARMERS MARKET, INC.
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(Exact name of registrant as specified in its charter)
Georgia 58-2037452
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1180 Upper Hembree Road, Roswell, Georgia 30076
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 667-8878
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N/A
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---------------------- -----------------------
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
Class A Common 4,118,056
- ---------------------------- ----------------------------
Class Outstanding at June 11, 1997
Class B Common 2,050,701
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Class Outstanding at June 11, 1997
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<PAGE>
HARRY'S FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Amounts in thousands (Unaudited)
April 30, January 29,
1997 1997
---------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 343 $ 1,326
Accounts receivable, net of allowance 106 254
Inventories 9,924 9,110
Other receivables 299 256
Notes receivable 411 58
Prepaid expenses 706 585
Pre-opening Expenses 61 -
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Total current assets 11,850 11,589
PROPERTY AND EQUIPMENT
Buildings 34,552 34,529
Equipment 24,101 23,721
Vehicles 148 102
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58,801 58,352
Accumulated depreciation (21,643) (20,565)
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37,158 37,787
Land 8,030 8,030
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45,188 45,817
OTHER ASSETS
Other Property and Equipment 1,902 1,902
Deposits on equipment 492 485
Loan costs 317 372
Other 430 263
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3,141 3,022
------- -------
Total assets $60,179 $60,428
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</TABLE>
See accompanying notes to financial statements
<PAGE>
HARRY'S FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Amounts in thousands (Unaudited)
April 30, January 29,
1997 1997
---------------------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations $ 594 $ 576
Accounts payable - trade 3,829 5,787
Accrued payroll and payroll taxes payable 530 546
Sales taxes payable 159 81
Other accrued liabilities 787 531
Accrued Income Taxes 22 -
-------- --------
Total current liabilities 5,921 7,521
LONG-TERM OBLIGATIONS, net of current maturities
Unearned consulting revenue 375 -
Notes Payable 13,820 26,225
CONVERTIBLE DEBT 11,454 -
REDEEMABLE PREFERRED STOCK 10,324 10,352
STOCKHOLDERS' EQUITY
Common Stock - Class A 34,623 34,623
Common Stock - Class B 3,936 3,936
Additional Paid-in Capital 1,638 513
Accumulated deficit (21,912) (22,742)
-------- --------
Total stockholders' equity 18,285 16,330
-------- --------
Total liabilities and stockholders' equity $ 60,179 $ 60,428
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</TABLE>
See accompanying notes to financial statements
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<PAGE>
HARRY'S FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Amounts in thousands, except per share data
For the Thirteen Weeks Ended,
---------------------------------------------
April 30, 1997 May 1, 1996
---------------------------------------------
<S> <C> <C> <C> <C>
Net sales $34,004 100.0% $33,514 100.0%
Cost of goods sold 25,070 73.7% 24,567 73.3%
------------------ ------------------
Gross profit 8,934 26.3% 8,947 26.7%
Operating expenses
Direct store expenses 5,491 16.2% 5,374 16.0%
Selling, general & administrative expenses 2,829 8.3% 2,717 8.1%
Depreciation and other amortization 784 2.3% 825 2.5%
------------------ ------------------
Total operating expenses 9,104 26.8% 8,916 26.6%
Operating income (loss) (170) -0.5% 31 0.1%
Interest expense 663 1.9% 724 2.2%
Other income (1,685) -5.0% (431) -1.3%
------------------ ------------------
Pretax income (loss) 852 2.5% (262) -0.8%
Income taxes 22 0.1% - 0.0%
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Net income (loss) 830 2.4% (262) -0.8%
Provision for accretion of warrants (37) -0.1% (57) -0.2%
------------------ ------------------
Net income (loss) applicable to common shareholders $ 793 2.3% $ (319) -1.0%
================== ==================
Net income (loss) per common share and
common equivalent share (Note D) $ 0.12 $ (0.05)
================== ==================
Net income (loss) per common share and
common equivalent share assuming full dilution $ 0.10 $ (0.05)
================== ==================
(Note D)
</TABLE>
See accompanying notes to financial statements
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<PAGE>
HARRY'S FARMERS MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Amounts in thousands For the Thirteen Weeks Ended,
---------------------------------
April 30, 1997 May 1, 1996
---------------------------------
<S> <C> <C>
Changes in Cash
Cash flows from operating activities:
Net earnings (loss) $ 830 $ (262)
Adjustments to reconcile net earnings (loss)
to cash provided (used) by operations:
Depreciation and amortization 1,130 1,188
Gain on sale of equipment - (194)
Gain on sale of intellectual property (1,422) -
Decrease in accounts receivable 148 13
Increase in other receivables (43) (50)
Increase in pre-opening expenses (61) -
Increase in inventories (814) (487)
Decrease (increase) in prepaid and deferred expenses (121) 201
Decrease (increase) in other assets 15 (15)
Increase (decrease) in accounts payable (1,958) 2
Increase in accrued liabilities 379 2
Increase in Income Taxes Payable 22 -
-------- -------
Net cash provided (used) by operating activities (1,895) 398
Cash flows from investing activities:
Capital expenditures, including capitalized interest (449) (705)
Proceeds from sale of property and equipment - 857
Increase in notes receivable (539) (2)
-------- -------
Net cash provided (used) by investing activities (988) 150
Cash flows from financing activities:
Proceeds from convertible debt issuance, net of costs 11,560 -
Line of credit (371) (540)
Principal payments on long-term obligations (12,205) (949)
Proceeds from warrants, net of costs 994 5
Proceeds from consulting agreement 500 -
Proceeds from sale of intellectual property, net of costs 1,422 -
-------- -------
Net cash provided (used) by financing activities 1,900 (1,484)
-------- -------
Net decrease in cash (983) (936)
Cash at beginning of period 1,326 1,042
-------- -------
Cash at end of period $ 343 $ 106
======== =======
</TABLE>
See accompanying notes to financial statements
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<PAGE>
HARRY'S FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
APRIL 30, 1997
NOTE A - BASIS OF PRESENTATION:
- -------------------------------
The interim financial statements included herein have been prepared by the
Company without audit. These statements reflect all adjustments which are, in
the opinion of management, necessary to present fairly the financial position as
of April 30, 1997 and the results of operations and cash flows for the thirteen
weeks then ended. All such adjustments are of a normal recurring nature.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these financial statements
be read in conjunction with the Financial Statements and notes for the fiscal
year ended January 29, 1997 included in the Annual Report on Form 10-K filed by
the Company.
NOTE B - INVENTORIES:
- ---------------------
Inventories consist primarily of grocery items and are stated at the lower of
cost or market. Cost is determined under the first-in, first-out (FIFO)
valuation method.
NOTE C - NOTES RECEIVABLE:
- --------------------------
On March 28, 1997, the Company entered into a Loan and Security Agreement (the
"Security Agreement") with Ritter Farms and Grainger County Tomato Company
(collectively, the "Borrower") pursuant to which the Company agreed to provide
up to $1.0 million in financing to the Borrower. The Borrower is the Company's
principal supplier of premium quality tomatoes. All funds advanced under the
Security Agreement are to bear interest at the rate of ten percent (10%) per
annum, are secured by a first priority security interest in certain of the
Borrower's assets and will be due and payable not later than December 31, 1997.
To date approximately $0.5 million has been advanced to the Borrower pursuant to
the Security Agreement.
In connection with the Security Agreement, and in order to provide an additional
source of liquidity to fund advances made to the Borrower thereunder, the
Company is in the process of amending its loan agreement with PFCI to provide
for the advance to the Company of up to $1.0 million of the amount PFCI has
committed to loan under such loan agreement for the purpose of assisting the
Company in funding obligations under the Security Agreement, if necessary (See
Note F). Any advances made under this proposed facility in connection with the
Security Agreement shall bear interest at a rate of 10% through June 6, 1998, at
a rate of 5% from such date through June 6, 2002 and thereafter at the Bank of
America Illinois' "reference rate" plus 1%. Interest and principal under the
proposed facility would be required to be paid at the same time as the Borrower
under the Security Agreement.
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<PAGE>
HARRY'S FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 1997
NOTE D- EARNINGS PER SHARE:
- ---------------------------
Net income (loss) per common share and common equivalent share was computed by
dividing net income by the weighted average number of shares of common stock and
common stock equivalents outstanding during the year. The number of common
shares was increased by the number of shares issuable on the exercise of options
and warrants when the market price of the common stock exceeds the exercise
price of the warrants and options. This increase in the number of common shares
was reduced by the number of common shares that are assumed to have been
purchased with the proceeds from the exercise of the options and warrants; those
purchases were assumed to have been made at the average price of the common
stock during that part of the year when the market price of the common stock
exceeded the exercise price of the options and warrants. The number of common
shares and common equivalent shares were 6,432,000 and 6,168,000 for the
thirteen weeks ended April 30, 1997 and May 1, 1996 respectively.
Net income(loss) per common share and common equivalent share-assuming full
dilution for the thirteen weeks ended April 30, 1997 was determined on the
assumption that the convertible debt was converted on January 31, 1997. Net
income was adjusted for interest of $176,000 which was net of tax of $4,000.
The resulting number of common shares and common equivalent shares for the
thirteen weeks ended April 30, 1997 were 9,432,000.
NOTE E - RECLASSIFICATION:
- --------------------------
Certain items have been reclassified in the presentation of the first thirteen
weeks of fiscal 1997 to conform with the presentation in the current period.
NOTE F- LOAN AGREEMENTS:
- ------------------------
On January 31, 1997, the Company entered into a series of agreements with
Progressive Food Concepts, Inc. ("PFCI") pursuant to which PFCI loaned the
Company $12,000,000 which is exchangeable for shares of Series B convertible
preferred stock of the Company. Such Series B convertible preferred stock is
convertible into 3,000,000 shares of the Company's Class A common stock. The
agreements also contain a commitment to loan up to an additional $8,000,000,
which will be exchangeable for shares of Series B convertible preferred stock of
the Company, which is convertible into an aggregate of 2,000,000 shares of Class
A common stock. If not earlier paid or accelerated for payment, the outstanding
principal of both these loans become an amortized term loan on January 31, 2002.
Both loans may be prepaid at any time without penalty or premium (See Note C.)
In addition, PFCI paid the Company $1,500,000 for the transfer of certain
intellectual property rights of the Company outside the States of Georgia and
Alabama, $1,000,000 for warrants to
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<PAGE>
HARRY'S FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 1997
purchase 2,000,000 shares of Class A common stock at exercise prices ranging
from $4.00 to $5.50, and $500,000 for a five-year mutual consulting arrangement.
Pursuant to the transfer of intellectual property rights, the Company also
received a 2.5% interest in PFCI.
The Company used approximately $13,000,000 of the proceeds from the transactions
discussed above to pay off a portion of their term loan outstanding at January
29, 1997. As a result of paying off part of such term loan, 144,000 of the
warrants to purchase 144,000 shares of Class A common stock at $6.00 per share
were canceled. The terms of the remaining portion of the term loan and line of
credit were also renegotiated and a new maturity date of January 29, 2000 was
established. In consideration for this transaction, the Company reduced the
strike price for 48,000 of the bank's outstanding warrants from $6 to $3. These
transactions resulted in one bank being replaced as the Company's senior credit
agent by another bank. The successor bank, Creditanstalt-Bankverein, received
72,000 of the warrants previously owned by the predecessor bank. These warrants
have an exercise price of $3 per share. As a result of this transaction, the
successor bank owns 216,000 warrants to purchase 216,000 shares Class A common
stock at $3 per share.
All of the outstanding Series A preferred shares were exchanged by the
shareholders for an equal number of the Company's newly issued Series AA
preferred stock, with a stated value of $9 per share. The Series AA preferred
stock is mandatorily redeemable on December 1, 2001 at the stated value (total
redemption value of $11,000,000). At any time prior to redemption, each share
of the Series AA preferred stock is convertible into the number of shares of
Class A common stock obtained by dividing the aggregate liquidation preference
of the Series AA preferred stock by the applicable conversion price. The
initial conversion price is $6.50 per share and is subject to adjustment in
certain circumstances. In connection with the exchange of Series A preferred
shares for Series AA preferred shares, the Company reduced the strike price of
the warrants outstanding from $10 to $4. The Company also designated 500,000
preferred shares as Series B convertible preferred stock. These Series B
preferred shares have a stated value of $40 with no shares issued and
outstanding after the transactions discussed above.
NOTE G - STOCK OPTIONS
- ----------------------
During the quarter ended April 30, 1997, the following changes occurred in
outstanding stock options:
Exercise
Shares Price
--------- -------------
Options outstanding, January 29, 1997 384,200 $3.00 - $6.00
Options granted 197,700 $3.00 - $6.00
Options cancelled (13,350) $ 6.00
Options exercised -0- -0-
------- -------------
Options outstanding, April 30, 1997 568,550 $3.00 - $6.00
======= =============
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<PAGE>
HARRY'S FARMERS MARKET, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS - CONTINUED
APRIL 30, 1997
NOTE H- NEW ACCOUNTING PRONOUNCEMENT
- ------------------------------------
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128, Earnings Per Share, which is effective for
financial statements issued after December 15, 1997. Early adoption of the new
standard is not permitted. The new standard eliminates primary and fully diluted
earnings per share and requires presentation of basic and diluted earnings per
share together with disclosure of how the per share amounts were computed. The
adoption of this new standard is not expected to have a material impact on the
disclosure of earnings per share in the financial statements.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Thirteen Weeks Ended April 30, 1997 compared to Thirteen Weeks Ended May 1,
1996.
Net sales for the thirteen weeks ended April 30, 1997 (the "1998 Quarter") were
approximately $34.0 million, compared to approximately $33.5 million for the
thirteen weeks ended May 1, 1996 (the "1997 Quarter"). Comparable store sales
increased 1.1% for the period. This increase is primarily attributed to the
continuous improvements in the Company's marketing and merchandising efforts
partially offset by the growing competition in the Atlanta area. In addition,
comparable store sales in the 1998 Quarter improved over the 1997 Quarter due to
the extreme weather condition in the Atlanta area during the 1997 Quarter that
adversely affected sales.
Gross profit in the 1998 Quarter remained relatively unchanged at approximately
$8.9 million compared with approximately $8.9 million in the 1997 Quarter.
However, as a result of the increase in the 1998 Quarter sales as compared to
the 1997 Quarter sales, gross profit as a percentage of net sales decreased to
26.3% compared to 26.7% in the 1997 Quarter.
Direct store expenses slightly increased to approximately $5.5 million or 16.2%
of net sales in the 1998 Quarter compared to approximately $5.4 million or 16.0%
of net sales in the 1997 Quarter. This increase is primarily due to: (1) labor
and labor related expenses being slightly higher in the 1998 Quarter because of
wage increases and incurring additional labor hours (time spent in addition to
regular duties) for training and consulting with PFCI employees and consultants,
and (2) higher repairs and maintenance expenses due to increased purchases of,
and ordinary repairs of, store equipment and (3) increased safety and sanitation
expenses. These expenses were offset with a decrease in supplies usage. As a
result of the incurring of the above expenses, the Company believes it will be
able to stay competitive in the local labor market, reward employees as
appropriate, continue to support the PFCI strategic alliance, better control
waste, and continue to maintain the safest and finest working conditions
possible.
Selling, general and administrative expenses slightly increased to approximately
$2.8 million or 8.3% of net sales in the 1998 Quarter from approximately $2.7
million or 8.1% of net sales in the 1997 Quarter. The increase in the 1998
Quarter is primarily attributable to (1)
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<PAGE>
higher consulting expenses from training potential general managers for future
Harry's In A Hurry stores, (2) higher repairs, maintenance and computer supplies
to support the corporate infrastructure, (3) higher bank charges related to
credit card usage which is in direct proportion to higher sales in the 1998
Quarter compared to the 1997 Quarter, and (4) increased advertising. These
expenses were offset with lower legal and accounting expenses and significantly
lower labor and labor related expenses.
Depreciation and amortization, which includes depreciation and amortization for
the stores and the corporate facilities, but excludes the manufacturing
facilities (which are included in cost of goods sold), declined slightly to
approximately $.78 million or 2.3% of net sales in the 1998 Quarter from
approximately $.83 million or 2.5% of net sales in the 1997 Quarter. This
reduction resulted primarily from certain assets becoming fully depreciated
prior to or during the 1998 Quarter.
Due to the reasons set forth above, the Company, during the 1998 Quarter, had an
operating loss of approximately $0.2 million or (0.5)% of net sales as compared
to an operating profit in the 1997 Quarter of approximately $0.03 million or
0.1% of net sales.
Interest expense decreased to approximately $0.6 million or 1.9% of net sales in
the 1998 Quarter compared to approximately $0.7 million or 2.2% of net sales in
the 1997 Quarter. This decrease is primarily attributable to a significant
reduction in the Company's interest rate. The convertible debt rate of interest
is 5%. The effective interest rate on the Company's previous long term debt was
approximately 9% at fiscal year end. This savings was partially offset by a one-
time adjustment to interest expense to write off the discount on long term debt
for early payoff.
Other income increased to approximately $1.7 million or 5.0% of net sales during
the 1998 Quarter, from approximately $0.4 million or 1.3% of net sales in the
1997 Quarter. This increase is primarily due to the recognition of the sale of
the Company's intellectual property, net of expenses, in the amount of
approximately $1.4 million to PFCI, and the recognition of
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<PAGE>
approximately $0.025 million of consulting income from PFCI. In addition, the
1997 Quarter contained a gain of approximately $0.2 million on the sale of an
outparcel at the Gwinnett megastore.
For the 1998 Quarter, the Company established an income tax provision of
approximately $0.02 million as a result of the income from the sale of the
intellectual property. The Company has net operating loss carry forwards of
approximately $21.5 million which may be applied against future earnings.
Should the Company experience a change in ownership in accordance with Section
382 of the Internal Revenue Code of 1986, as amended, the extent that the
Company may apply such loss carry forwards may be limited.
As a result of the above, the Company's operations produced net income for the
1998 Quarter of approximately $0.8 million or $.12 per common and common
equivalent share, compared with a net loss of approximately $0.3 million or
($.05) per common and common equivalent share during the 1997 Quarter.
Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" was
issued in March 1995 and was adopted January 1996. The adoption of SFAS No. 121
had no impact on the results of operations.
LIQUIDITY AND CAPITAL RESOURCES
During the 1998 Quarter, the Company's operating activities used approximately
$1.9 million in cash. The cash used from operations was primarily for additional
seasonal inventory items and a significant reduction in accounts payable. The
Company invested approximately $0.4 million in capital expenditures and incurred
an increase of approximately $0.5 million in notes receivable. Additionally, the
Company paid approximately $0.4 million on its line of credit and approximately
$12.2 million on its long term obligations. The Company received approximately
$11.6 million net of expenses from the convertible debt proceeds, approximately
$0.5 million in proceeds from the Consulting Agreement, as described herein,
approximately $1.4 million in net proceeds from the sale of Intellectual
Property, as described below, and approximately $1.0 million net of expenses for
warrants. As a result, net cash during the 1998 Quarter decreased by
approximately $1.0 million resulting in a quarter-end cash balance of
approximately $0.3 million. The Company had available at quarter end
approximately $1.5
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<PAGE>
million in additional borrowing capacity under its bank line of credit facility,
$8.0 million under its Development Loan facility, as defined below, and, once
amended, as described herein, the Company believes an additional $1.0 million
will be available under the Development Loan facility.
Cash used by investing activities in the 1998 Quarter was approximately $1.0
million. Investing activities consisted of capital expenditures for property and
equipment relating to stores, manufacturing facilities, and the corporate
infrastructure and an increase in notes receivable. During the 1998 Quarter, the
Company used approximately $0.2 million on computer hardware to improve
information systems, approximately $0.1 million on computer software to improve
the Company's codification and knowledge transfer of manufacturing processes,
and approximately $0.1 million for floor equipment, building improvements and
additional transportation equipment for use at the stores and manufacturing
facilities. Total capital expenditures were approximately $0.4 million. In
addition to capital expenditures, notes receivable increased by approximately
$0.5 million for financing the Company's principal supplier of premium quality
tomatoes, as described below. Total cash used by investing activities was
approximately $1.0 million.
On March 28, 1997, the Company entered into a Loan and Security Agreement (the
"Security Agreement") with Ritter Farms and Grainger County Tomato Company
(collectively, the "Borrower") pursuant to which the Company agreed to provide
up to $1.0 million in financing to the Borrower. The Borrower is the Company's
principal supplier of premium quality tomatoes, and the Security Agreement was
entered into in connection with the Borrower's reorganization under Chapter 11
of the United States Bankruptcy Code. All funds advanced under the Security
Agreement bear interest at the rate of ten percent (10%) per annum, are
secured by a first priority security interest in certain of the Borrower's
assets and will be due and payable not later than December 31, 1997. To date
approximately $0.5 million has been advanced to the Borrower pursuant to the
Security Agreement.
Cash provided by financing activities in the 1998 Quarter was approximately $1.9
million. Financing activities consisted mainly of an early payoff of the
Company's long-term debt of approximately $12.0 million, other payments of long
term debt of approximately $0.2 million, net proceeds from the issuance of the
convertible debt of approximately $11.6 million,
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<PAGE>
net proceeds from the sale of warrants of approximately $1.0 million,
approximately $0.4 million payment on the line of credit, approximately $0.5
million in proceeds from the Consulting Agreement and approximately $1.4 million
in net proceeds from the sale of Intellectual Property, as described below. At
the end of the 1998 Quarter, the Company had approximately $1.5 million left on
the bank line of credit facility, $8.0 million available under the Development
Loan facility and an additional $1.0 million to be available once the Loan
Agreement is amended. Cash at the end of the 1998 Quarter was approximately $0.3
million.
To increase liquidity, the Company continues to seek purchaser(s)/leasee(s) for
the unused portion of the distribution facility, as well as the remaining
outparcel at the Gwinnett County megastore property.
The Company's working capital position in the 1998 Quarter was approximately
$5.9 million as compared to the fiscal year end of approximately $4.0 million.
The increase in working capital is due largely to the significant decrease in
accounts payable of approximately $2.0 million.
Pursuant to a Secured Loan Agreement (the "Loan Agreement") dated as of January
31, 1997, the Company has received a commitment from PFCI for certain loans in
an aggregate principal amount not to exceed $20 million outstanding. The
aggregate amount includes a term loan to the Company in the principal amount of
$12 million ("Refinancing Loan"), which was funded on January 31, 1997 and used
by the Company to repay certain indebtedness, and an $8 million development loan
(the "Development Loan" and, together with the Refinancing Loan, the "Loans") to
be used by the Company for general corporate purposes and to fund development
costs relating to the development of a business model for the improvement of the
Company's business and facilities as contemplated by the Consulting Agreement,
as defined below. Such Loans shall accrue interest at a rate of 5% per annum
for a period of five years from January 31, 1997 and at the "reference rate", as
set by the Bank of America, Illinois, plus 1% thereafter. The Loans are
subordinated in right of payment to certain indebtedness of the Company and are
secured by a second priority lien on substantially all of the assets of the
Company and its subsidiaries.
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<PAGE>
In connection with the Security Agreement, and in order to provide an additional
source of liquidity to fund advances made to the Borrower thereunder, the
Company is in the process of amending its loan agreement with PFCI to provide
for the advance to the Company of up to $1.0 million of the amount PFCI has
committed to loan under such loan agreement for the purpose of assisting the
Company in funding obligations under the Security Agreement, if necessary (See
Note F). Any advances made under this proposed facility in connection with the
Security Agreement shall bear interest at a rate of 10% through June 6, 1998, at
a rate of 5% from such date through June 6, 2002 and thereafter at the Bank of
America Illinois' "reference rate" plus 1%. Interest and principal under the
proposed facility would be required to be paid at the same time as the Borrower
under the Security Agreement.
Pursuant to a Transaction Agreement (the "Transaction Agreement"), dated as of
January 31, 1997,, PFCI has paid to the Company $1,000,000 in exchange for the
issuance of the Warrant. The Warrant, which expires on January 31, 2001, is
exercisable at prices ranging from $4.00 to $5.50 per share, subject to
adjustment in certain circumstances.
Pursuant to the Transaction Agreement, the Company agreed that at any time the
Company desires to seek additional financing (whether debt or equity financing),
the Company will negotiate in good faith with PFCI for a period of 20 days with
regard to any portion of the entire amount (at the option of PFCI) of such
financing prior to negotiating with any other entity with regard thereto.
As of January 31, 1997, the Company transferred to a newly organized business
trust (the "Trust") certain federal and state registered and unregistered
trademarks, trademark applications, registered and unregistered service marks,
service mark applications, trade names, trade name rights, copyrights, trade
secrets and know-how and other proprietary information of the Company (the
"Intellectual Property"). The Trust issued to the Company two ownership
certificates, one of which entitles the holder thereof to beneficial ownership
of the Intellectual Property in the States of Georgia and Alabama and one of
which (the "Worldwide Certificate") entitles the holder thereof to beneficial
ownership of the Intellectual Property throughout the rest of the world.
Neither the Company nor either certificate holder is entitled to any continuing
royalties or other fees associated with the use of the Intellectual Property by
the other party. The Trust also granted to the Company and PFCI licenses to use
the Intellectual Property in their respective territories.
-15-
<PAGE>
The Company then sold the Worldwide Certificate to PFCI for $1,500,000 in cash
and 712.3746 shares of the common stock, par value $0.1 per share, of PFCI
("PFCI Common Stock"), representing 2.5% of the PFCI Common Stock on a fully
diluted basis, taking into account (i) all shares of outstanding PFCI Common
Stock, (ii) all shares of PFCI Common Stock issuable upon the exchange or
conversion of outstanding debt, stock or other securities of PFCI and (iii) all
shares of PFCI Common Stock issuable upon the exercise of outstanding options
(other than unvested employee options), warrants or similar rights to acquire
PFCI Common Stock. The Company also received certain anti-dilution rights with
respect to the issuance in the future of additional PFCI Common Stock. PFCI,
which was formed for the purpose of engaging in the herein described
transactions with the Company, has been funded with a $17 million loan from
Boston Chicken, Inc., convertible into shares of PFCI Common Stock, and equity
and equity commitments from management and private investors. Harry A. Blazer
has been elected a director of PFCI.
The Company, Harry A. Blazer and PFCI have entered into a five year Consulting
Services Agreement (the "Consulting Agreement"), pursuant to which the Company
has agreed to provide, for the period ending on January 31, 2002, certain
consulting services and access to personnel, information and facilities of the
Company for the purpose of developing a business model based on the current
businesses (and certain businesses related to the current businesses) of the
Company, including the creation of new organizational, systems, human resources,
accounting and financial structures and models. A portion of the expenses of
such development by the Company will be funded by the Company through the
Development Loan. In addition, PFCI has agreed to make available its general
business know-how and the information and know-how it acquires under the
Consulting Agreement to the Company during the term of the Consulting Agreement.
PFCI paid the Company on January 31, 1997 a consulting services fee of $500,000
under the Consulting Agreement. The paid fee will be considered unearned
consulting revenue and recognized as consulting income on a monthly basis in the
amount of $8,333.33. The Company has recorded $25,000.00 as consulting income
during the 1998 Quarter.
In connection with the above-described transactions, the Company used
approximately $13.0 million of proceeds, $12.0 million of which was funded by
the Refinancing Loan advanced under the Loan Agreement and the remainder of
which was funded by monies that the Company
-16-
<PAGE>
received for the sale of the Worldwide Certificate to PFCI and in exchange for
the Warrant issued under the Transaction Agreement, to repay in full all of the
obligations owing under the Amended and Restated Credit Agreement (as amended,
the "Senior Credit Agreement") to NationsBank, N.A. (South), formerly known as
NationsBank of Georgia, National Association ("NationsBank"). In addition, the
Company and other related parties consummated the following transactions: (i)
NationsBank assigned to Creditanstalt-Bankverein ("Creditanstalt") all of its
revolving commitment and its interest in the revolving loans advanced under the
Senior Credit Agreement; (ii) NationsBank resigned as agent under the Senior
credit Agreement, (iii) Creditanstalt was appointed successor agent; and (iv)
NationsBank transferred to Creditanstalt all of its warrants to purchase shares
of Class A Common Stock, of which Creditanstalt retained 72,000 warrants (having
an exercise price of $3.00 per share) and surrendered to the Company for
cancellation 144,000 warrants.
Further, the Company and Creditanstalt amended the Senior Credit Agreement to,
among other things: (i) provide for the consummation of the transactions set
forth in the Transaction Agreement, including without limitation, the commitment
of the Loans and the grant of the Option under the Secured Loan Agreement, the
issuance of the Warrants under the Transaction Agreement, the sale of the
Worldwide Certificate, and all other transactions contemplated therein and
thereby; and (ii) amend certain provisions thereof, including certain negative
covenants and certain financial covenants. In addition, the Company and
Creditanstalt agreed to reduce the exercise price of warrants to purchase 48,000
shares of Class A Common Stock from $6.00 to $3.00. As a result of these
transactions, Creditanstalt now holds warrants to purchase an aggregate of
216,000 shares of Class A Common Stock, all at an exercise price of $3.00 per
share.
The Company's ability to fund its working capital and capital expenditure
requirements, make interest payments and meet its other cash requirements
depends, among other things, on the availability of internally generated funds
and the continued availability of and compliance with its credit facilities.
Management believes that internally generated funds and its available credit
facilities, as restructured, will provide the Company with sufficient sources of
funds to satisfy its anticipated cash requirements in fiscal 1998. However, if
there is a significant reduction of
-17-
<PAGE>
internally generated funds, the Company may require funds from outside financing
sources. In such event, there can be no assurance that the Company would be
able to obtain such funding as and when required or on acceptable terms.
Cautionary Statement for Purposes of "Safe Harbor Provisions" of the Private
Securities Litigation Reform Act of 1995.
Certain statements contained in this filing are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995, such
as statements relating to financial results, business strategy, plans for future
business development activities, capital spending or financing sources, capital
structure and the effects of regulation and competition, and are thus
prospective. Such forward-looking statements are subject to risks, uncertainties
and other factors which could cause actual results to differ materially from
future results expressed or implied by such forward-looking statements.
Potential risks and uncertainties include, but are not limited to: economic
conditions, changes in consumer spending, weather, competition, changes in the
rate of inflation, changes in state or federal legislation or regulation,
inability to develop new stores as planned, stability of product costs, and
other uncertainties detailed from time to time in the Company's Securities and
Exchange Commission filings.
-18-
<PAGE>
PART II - OTHER INFORMATION
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits.
The following exhibit is filed with this report:
Exhibit
Number Description of Exhibit
- ------- ----------------------
10.1 Loan and Security Agreement dated as of March 28,
1997 by and among Ritter Farms and Grainger Tomato
Company and the Company.
B. No reports on Form 8-K were filed during the quarter for which this report
is filed.
-20-
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARRY'S FARMERS MARKET, INC.
Dated: June 12, 1997 By: /s/ Harry A. Blazer
------------- -------------------
HARRY A. BLAZER
Chairman, President and Chief
Executive Officer (principal
executive officer)
Dated: June 12 , 1997 By: /s/ Harold C. Weissman
-------------- ----------------------
HAROLD C. WEISSMAN
Treasurer and Chief Financial Officer
(principal financial and accounting
officer)
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<PAGE>
EXHIBIT 10.1
LOAN AND SECURITY AGREEMENT
DATED AS OF MARCH 28, 1997
BY AND AMONG
RITTER FARMS
AND
GRAINGER COUNTY TOMATO COMPANY,
AS THE BORROWERS,
AND
HARRY'S FARMERS MARKET, INC.,
AS THE LENDER
<PAGE>
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT is dated as of March 28, 1997 (this "Loan
and Security Agreement"), by and among RITTER FARMS, a Tennessee partnership
("Ritter Farms"), and GRAINGER COUNTY TOMATO COMPANY, a Tennessee partnership
("GCTC"); (Ritter Farms and GCTC are referred to hereinafter, individually, as a
"Borrower" and, collectively, as the "Borrowers), and HARRY'S FARMERS MARKET,
INC. (the "Lender").
WHEREAS, the Lender desires to make available to the Borrowers certain
financial accommodations on the terms and conditions contained herein;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged by the parties hereto, the parties
hereto agree as follows:
ARTICLE I
DEFINITIONS
-----------
SECTION 1.01 DEFINITIONS. For the purposes of this Loan and Security
----------
Agreement:
"Account Debtor" means a Person who has obligations under a Receivable or
--------------
any other customer of the Borrowers.
"Affiliate" means, with respect to a Person, any other Person that,
----------
directly or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, such given Person.
"Applicable Law" means all applicable provisions of constitutions,
---------------
statutes, laws, rules, regulations and orders of all governmental bodies and all
orders, rulings and decrees of all courts and arbitrators.
"Bankruptcy Code" means Title 11 of the United States Code, Section 101, et
---------------- --
seq.
- ---
"Bankruptcy Court" means the United States Bankruptcy Court for the Eastern
-----------------
District of Tennessee, or any other court having jurisdiction over the Cases
from time to time.
"Bankruptcy Rules" means the Federal Rules of Bankruptcy Procedure.
-----------------
"Blocked Account" means the depository account that is covered by and is
----------------
the subject of the Blocked Account Agreement and into which any and all
Receivables of the Borrowers shall be deposited.
<PAGE>
"Blocked Account Letter" means that certain Blocked Account Letter
------------------------
substantially in the form attached hereto as Exhibit A.
-----------
"Borrowing" means a borrowing by the Borrowers of the Loans pursuant to
-----------
Section 2.01 hereunder.
"Budget" means the consolidated budget of the Borrowers set forth on
-------
Schedule 1.01(a) hereof.
"Business Day" means any day other than a Saturday, Sunday or other day on
-------------
which banks in Atlanta, Georgia are authorized to close.
"Carve-Out" means the carve-out for professional fees set forth in
-----------
Paragraph 7 of the Interim Order.
"Case" or "Cases" means the Chapter 11 Case or Cases of the Borrowers
----- ------
pending in the Bankruptcy Court.
"Collateral" means and includes all of the right, title and interest of the
------------
Borrowers in and to each of the following, wherever located and whether now or
hereafter existing or now owned or hereafter acquired or arising:
(a) all Receivables;
(b) all Inventory;
(c) all Farm Products;
(d) all Equipment;
(e) all rights of the Borrowers as an unpaid vendor or lienor (including
but not limited to, stoppage in transit, replevin and reclamation) with respect
to any Inventory, Farm Products or other properties of the Borrowers;
(f) all documents of title, warehouse receipts, bills of lading, policies
and certificates of insurance, securities, chattel paper and other documents and
instruments evidencing or pertaining to any and all items of Collateral;
(g) all books, records, files and correspondence in any way related to any
of the Collateral; and
(h) any and all products and proceeds of any of the foregoing (including
but not limited to, any claims to any items referred to in this definition, and
any claims of the Borrowers against third parties for loss of, damage to or
-2-
<PAGE>
destruction of any or all of the Collateral or for proceeds payable under, or
unearned premiums with respect to, policies of insurance) in whatever form,
including, but not limited to, cash, negotiable instruments and other
instruments for the payment of money, chattel paper, security agreements and
other documents.
"Committee" means the official committee of unsecured creditors appointed
----------
in the case if such a committee is involved.
"Commitment" has the meaning set forth in Section 2.01 hereof.
------------
"Confirmed Plan" means a plan of reorganization in the Case which has been
---------------
confirmed by the Bankruptcy Court pursuant to Section 1129 of the Bankruptcy
Code.
"Consolidated Net Operating Profits" has the meaning set forth in Section
-----------------------------------
2.03 hereof.
"Consummation Date" means the date of the substantial consummation (as
------------------
defined in Section 1101 of the Bankruptcy Code).
"Equipment" means all equipment, machinery, apparatus, fittings, fixtures
----------
and other tangible personal property (other than Inventory and Farm Products) of
every kind and description used in the business operations, or owned by, the
Borrowers or in which the Borrowers have an interest, and all parts, accessories
and special tools and all increases and accessions thereto and substitutions and
replacements therefor.
"Event of Default" means any of the events specified in Section 11.01
-----------------
hereof.
"Existing Tax Obligations" means the taxes, assessments and other
-------------------------
governmental charges or levies upon the borrowers and their respective
properties, income, profits and assets which are due and payable as of the date
of this Loan and Security Agreement.
"Farm Products" means all of the crops and seed of the Borrowers now or
---------------
hereafter growing or grown, including but not limited to, tomato crops and seed,
and all other personal property of the Borrowers used or for use in farming
operations, including but not limited to, native grass, grain, fertilizer, hay,
silage, livestock (including but not limited to, unborn and born offspring) and
supplies now or hereafter owned by the Borrowers or now or hereafter purchased
by or for the benefit of the Borrowers. Farm Products also shall include, but
shall not be limited to, all now owned or hereafter acquired feed additives,
feed supplements, veterinary supplies and related products of the Borrowers
whether purchased by or for the benefit of the Borrowers, and any other farm
products, as that term is defined in the Uniform Commercial Code.
"Final Order" means the Order approving this Loan and Security Agreement,
------------
the Note and the other Loan Documents executed and delivered, as appropriate, by
the Borrowers, the Guarantors and the Lender entered on the bankruptcy docket
after notice as required by Bankruptcy Rule 4001 in the cases, the former of
-3-
<PAGE>
which is subject to the review and approval of the Lender.
"Financing Statements" means any and all financing statements (i) executed
---------------------
and delivered by or on behalf of the Borrowers in connection with the perfection
of the Security Interest (as defined herein) and (ii) by the Guarantors in
connection with the perfection of the Security Interest (as defined in the
Guaranty), together with any amendments thereto and any continuations thereof.
"Governmental Approvals" means all authorizations, consents, approvals,
-----------------------
licenses and exemptions of, registrations and filings with, and reports to, all
governmental bodies.
"Guarantors" means Jack Ritter and Nancy Ritter, jointly and severally, and
-----------
any and all other Persons which guaranty the Secured Obligations of the
Borrowers under this Loan and Security Agreement.
"Guaranty", "Guaranteed" or to "Guarantee" as applied to any obligation
--------- ------------ -----------
means and includes:
(a) a guaranty (other than by endorsement of negotiable instruments for
collection in the ordinary course of business), directly or indirectly, in any
manner, of any part or all of such obligation, or
(b) an agreement, direct or indirect, contingent or otherwise, and whether
or not constituting a guaranty, the practical effect of which is to assure the
payment or performance (or payment of damages in the event of nonperformance) of
any part or all of such obligation.
As the context requires, "Guaranty" includes but is not limited to the Guaranty
---------
and Security Agreement dated as of the date hereof by and among Jack Ritter and
Nancy Ritter, as joint and several Guarantors, and the Lender.
"Hazardous Materials" means materials defined as "hazardous waste or
--------------------
substances" under the Comprehensive Environmental Response, Compensation and
Liability Act, 42 U.S.C. (S)9601, et seq. and the Resource Conservation and
Recovery Act, 42 U.S.C. (S)6903 et seq., and other solid, semi-solid, liquid or
gaseous substances which are toxic, ignitable, corrosive, carcinogenic or
otherwise dangerous to human, plant or animal health and well being.
"Indebtedness" means, as to any Person, all items (except items of capital
-------------
stock, additional paid-in capital, retained earnings, capital contributions or
other items classified as capital under generally accepted accounting principles
consistently applied, or items of general contingency or deferred tax reserves)
which, in accordance with generally accepted accounting principles consistently
applied, would be included in determining total liabilities on a balance sheet
-4-
<PAGE>
of such Person as at the date the Indebtedness is to be determined.
"Interim Order" means an that certain interim order authorizing Debtor in
--------------
Possession Financing in each of the referenced cases, a copy of which is
attached hereto as Exhibit B.
---------
"Inventory" means (a) all inventory and all other goods intended for sale
----------
or lease by the Borrowers, or for display or demonstration, other than Farm
Products; (b) all work in process of the Borrowers; (c) all raw materials and
other materials and supplies of every nature and description used or which might
be used in connection with the manufacture, packing, shipping, advertising,
selling, leasing or furnishing of such goods or otherwise used or consumed in
the business of the Borrowers; and (d) all documents relating to any of the
foregoing.
"Lien" means any security interest, lien, encumbrance, mortgage, deed to
-----
secure debt, deed of trust, pledge, charge, conditional sale or other title
retention agreement, or other encumbrance of any kind covering any property of a
Person.
"Loan" has the meaning set forth in Section 2.01 hereof.
------
"Loan Documents" means this Loan and Security Agreement, the Note, the
----------------
Guaranties, the Financing Statements and any other document or instrument
executed and delivered by the Borrowers and the Guarantors, as the case may be,
in connection herewith or therewith.
"Note" means a promissory note of the Borrowers in favor of the Lender in
-----
substantially the form of C attached hereto.
---
"Orders" means, together, the Interim Order and the Final Order.
--------
"Pending Litigation" means, individually and collectively, the matters set
------------------
forth on Schedule 1.01(b) hereof.
"Permitted Liens" means: (a) Liens securing taxes, assessments and other
----------------
governmental charges or levies not yet due and payable or the claims of
materialmen, mechanics, carriers, warehousemen or landlords for labor,
materials, supplies or rentals incurred in the ordinary course of business but
not yet due and payable; (b) Liens consisting of deposits or pledges made, in
the ordinary course of business, in connection with, or to secure payment of,
obligations under workmen's compensation, unemployment insurance or similar
legislation; (c) Liens consisting of encumbrances in the nature of zoning
restrictions, easements, and rights or restrictions of record on the use of real
property, which in the sole judgment of the Lender do not materially detract
from the value of such property or impair the use thereof in the business of the
Borrowers; (d) Prior Liens; and (e) Liens in favor of the Lender.
-5-
<PAGE>
"Person" means an individual, corporation, limited liability company,
-------
partnership, association, trust or unincorporated organization, or a government
or any agency or political subdivision thereof.
"Petition Date" means March 24, 1997.
---------------
"Prior Liens" means those certain Liens on the Borrowers' assets which are
-------------
validly perfected, unavoidable, and not terminated by 11 U.S.C. (S)552.
"Receivables" means all accounts and any and all rights to the payment of
-------------
money or other forms of consideration of any kind (whether classified under the
Uniform Commercial Code as accounts, chattel paper, general intangibles, or
otherwise) for goods sold or leased or for services rendered, including but not
limited to, accounts receivable, proceeds of any letters of credit naming the
Borrowers as beneficiaries, chattel paper, tax refunds, insurance proceeds,
contract rights, notes, drafts, instruments, documents, acceptances, and all
other debts, obligations and liabilities in whatever form from any Person. For
purposes of this definition, Receivables shall not include, and shall be net of,
the contingency fees payable to the attorneys representing the Borrowers in the
Pending Litigation, contingent in each case upon the rendering of a final
judgment on the merits and the exhaustion of all appeals in favor of the
Borrowers.
"Secured Obligations" means, individually and collectively:
---------------------
(a) all Loans made to the Borrowers by the Lender under this Loan and
Security Agreement on or after the Petition Date;
(b) all obligations of the Borrowers to the Lender of every kind, nature
and description, under or in respect of this Loan and Security Agreement or any
other Loan Document, whether direct or indirect, absolute or contingent, due or
not due, contractual or tortious, liquidated or unliquidated, and whether or not
evidenced by any note incurred on or after the Petition Date; and
(c) all other obligations of the Borrowers to the Lender and all future
advances made to the Borrowers by the Lender on or after the Petition Date,
however and whenever created, arising or evidenced, whether direct or indirect,
through assignment from third parties, whether absolute or contingent, or
otherwise, now or hereafter existing, or due or to become due, including,
without limitation, obligations under all guaranties, letters of credit and
overdrafts.
"Security Interest" means the Lien of the Lender in the Collateral effected
------------------
hereby or by any of the Loan Documents.
"Subsidiary" means a Person of which an aggregate of 50% or more of the
------------
voting stock of any class or classes or 50% or more of other voting interests is
-6-
<PAGE>
owned of record or beneficially by another Person, or by one or more
Subsidiaries of such other Person, or by such other Person and one or more
Subsidiaries of such Person.
"Super-Priority Claim" means a claim against the Borrowers in the Case
---------------------
which is an administrative expense claim pursuant to Section 364(c)(1) of the
Bankruptcy Code having priority over any or all administrative expenses of the
kind specified in Sections 105, 326, 330, 331, 503(b), 507(a) and 507(b) of the
Bankruptcy Code.
"Supply Agreement" means that certain Letter Agreement dated March ___,
------------------
1997 by and between the Lender, Grainger County Tomato Company, Ritter Farms and
Jack & Nancy Ritter relative to the supply of tomatoes to the Lender,
substantially in the form of Exhibit D attached hereto.
---------
"Termination Date" means December 31, 1997, and any date to which
-----------------
extensions thereof have been effected pursuant to Section 2.03 hereof.
"Uniform Commercial Code" shall mean the Uniform Commercial Code as in
------------------------
effect in the State of Georgia, as the same may be amended from time to time.
"U.S. Trustee Operating Report" means the monthly operating report that,
------------------------------
under the Orders, shall be filed with the Bankruptcy Court and delivered to the
U.S. Trustee.
ARTICLE II
REVOLVING CREDIT FACILITY
-------------------------
Section 2.01. Revolving Commitment; Borrowings.
---------------------------------
(a) Upon the terms and conditions of this Loan and Security Agreement, the
Lender shall make loans (the "Loans") to the Borrowers from time to time during
the period from the date hereof through but not including the Termination Date;
provided, however, that the maximum aggregate principal amount of Loans
- ------------------
outstanding shall not exceed the amount set forth below opposite the respective
period (the "Commitment"):
MAXIMUM AGGREGATE PRINCIPAL AMOUNT
OUTSTANDING (THE "COMMITMENT")
PERIOD
- --------------------------------------------------------------------------
For the period ending March 31, 1997 148,300
- --------------------------------------------------------------------------
For the period ending April 30, 1997 450,900
- --------------------------------------------------------------------------
For the period ending May 31, 1997 687,900
- --------------------------------------------------------------------------
For the period ending June 30, 1997 871,900
- --------------------------------------------------------------------------
For the period ending December 30, 1997 1,000,000
- --------------------------------------------------------------------------
; provided, further, however, that the Commitment shall be reduced automatically
----------------------------
by the amount of any mandatory prepayment required under Section 2.03 hereof.
-7-
<PAGE>
(b) Each Borrowing of a Loan shall be in an aggregate minimum amount of
$50,000 and integral multiples of $1,000 in excess of that amount. The
Borrowers shall give the Lender written notice pursuant to a Notice of Borrowing
or telephonic notice of each Borrowing. Any such telephonic notice shall
include all information to be specified in a written Notice of Borrowing and
shall be promptly confirmed in writing by the Borrowers pursuant to a Notice of
Borrowing sent to the Lender by telecopy on the same day of such telephonic
notice. The Notice of Borrowing shall specify the aggregate principal amount of
Loans to be borrowed from the Lender pursuant to the Notice of Borrowing and the
date the Loans are to be borrowed. Each Notice of Borrowing shall be delivered
to the Lender before 10:00 a.m., Atlanta time, on the date one Business Day
prior to the date of such Borrowing. Each Notice of Borrowing or telephonic
notice of each Borrowing shall be irrevocable once given and binding on the
Borrowers.
Section 2.02. Repayment of Loans. The Borrowers shall repay the entire
------------------
outstanding principal amount of, and all accrued but unpaid interest on, the
Loans on the Termination Date.
Section 2.03. Mandatory Prepayments of Loans. If on the last day of any
-------------------------------
calendar month during the term of this Agreement the Borrowers shall have for
such calendar month Consolidated Net Operating Profits, the Borrowers shall,
within fifteen (15) days after the end of such calendar month, prepay the Loans
in an amount equal to the product of (i) the Consolidated Net Operating Profits
for any such calendar month times (ii) 80% (which product is referred to
hereinafter as the "Mandatory Prepayment"). The Commitment shall be reduced
automatically by the amount of each Mandatory Prepayment. For purposes of this
Section 2.03, "Consolidated Net Operating Profits" for any calendar month means
(x) the actual consolidated gross operating profits of the Borrowers minus (y)
the actual consolidated expenses of the Borrowers for farm operations, packing,
and administrative and general expenses, in the case of each of the immediately
preceding clauses (x) and (y), as shown on the U.S. Trustee Operating Report for
such calendar month.
Section 2.04. Termination of Revolving Credit Facility. Any notice of
------------------------------------------
termination or termination given by the Borrowers hereunder shall be
irrevocable, and the amount to be prepaid (including accrued interest and the
termination fee) shall be due and payable on such date, which shall be a
Business Day, designated in such notice.
ARTICLE III
INTEREST, FEES AND OTHER PROVISIONS
-----------------------------------
Section 3.01. Interest.
---------
(a) The Borrowers shall pay interest (calculated on the basis of a year of
360 days and the actual number of days elapsed) on the unpaid principal amount
-8-
<PAGE>
of each Loan for each day from the day such Loan was made until such Loan is due
(whether upon demand, at maturity, by reason of acceleration or otherwise) at a
rate per annum equal to ten percent (10%). Unless otherwise provided herein,
such interest shall be payable monthly on the first Business Day of each
calendar month, commencing the first such date after the date hereof.
(b) If the Borrowers shall fail to pay when due (whether at maturity, by
reason of acceleration or otherwise) all or any portion of the principal of, or
interest on, any Loan, each such unpaid amount shall no longer bear interest in
accordance with the terms of Section 3.01(a) but shall bear interest (calculated
on the basis of a year of 360 days and the actual number of days elapsed) for
each day from the date it was so due until paid in full at a rate per annum
equal to the sum of (i) five percent (5%) plus (ii) the rate payable from time
----
to time pursuant to Section 3.01(a), such interest under this Section 3.01(b) to
be payable on demand.
Section 3.02. Statement of Account. The Lender will provide to the
---------------------
Borrowers monthly a statement of Loans disbursed, charges incurred and payments
made pursuant to this Loan and Security Agreement and the outstanding amount of
obligations of the Borrowers hereunder. The entries in such statement shall be
binding and conclusive upon the Borrowers unless objected to by the Borrowers
within thirty days after the receipt thereof. Failure of the Lender to provide
such statement shall in no way affect its rights or the obligations of the
Borrowers hereunder.
Section 3.03. Agreement Regarding Interest and Changes. THE PARTIES
-----------------------------------------
HERETO HEREBY AGREE AND STIPULATE THAT THE ONLY CHARGE IMPOSED UPON THE
BORROWERS FOR THE USE OF MONEY IN CONNECTION WITH THIS LOAN AND SECURITY
AGREEMENT IS AND SHALL BE THE INTEREST DESCRIBED IN SECTION 3.01 ABOVE. THE
PARTIES HERETO FURTHER AGREE AND STIPULATE THAT ALL OTHER CHARGES IMPOSED BY THE
LENDER UPON THE BORROWERS IN CONNECTION WITH THIS LOAN AND SECURITY AGREEMENT,
INCLUDING ALL DEFAULT CHARGES, LATE CHARGES, ATTORNEYS' FEES AND REIMBURSEMENT
FOR COSTS AND EXPENSES PAID BY THE LENDER TO THIRD PARTIES OR FOR DAMAGES
INCURRED BY THE LENDER, ARE CHARGES MADE TO COMPENSATE THE LENDER FOR
UNDERWRITING OR ADMINISTRATIVE SERVICES AND COSTS OR LOSSES PERFORMED OR
INCURRED, AND TO BE PERFORMED OR INCURRED, BY THE LENDER IN CONNECTION WITH THIS
LOAN AND SECURITY AGREEMENT, AND SHALL UNDER NO CIRCUMSTANCES BE DEEMED TO BE
CHARGES FOR THE USE OF MONEY PURSUANT TO OFFICIAL CODE OF GEORGIA ANNOTATED
SECTION 7-4-2(a)(3). ALL CHARGES OTHER THAN CHARGES FOR THE USE OF MONEY SHALL
BE FULLY EARNED AND NONREFUNDABLE WHEN DUE.
Section 3.04. Payments. Unless otherwise set forth herein, all payments
---------
to the Lender shall be made by the Borrowers in United States dollars in
-9-
<PAGE>
immediately available funds not later first than 12:30 p.m., Atlanta, Georgia
time, on the due date thereof at the address of the Lender set forth in Section
12.01 hereof.
Section 3.05. Authorization to Charge Loan Account. The Borrowers hereby
------------------------------------
confirm and authorize the Lender, and the Lender hereby agrees, to charge the
loan account with the amount of all Secured Obligations due hereunder when such
payment becomes due.
ARTICLE IV
CONDITIONS PRECEDENT
--------------------
Section 4.01. Conditions Precedent to Initial Loan. (a) The obligation
-------------------------------------
of the Lender to make the initial Loan is subject to the condition that the
Lender shall have received each of the following documents, each of which shall
be satisfactory in form and substance to the Lender:
(i) the Loan and Security Agreement duly executed and delivered by the
Borrowers;
(ii) the Note duly executed and delivered by the Borrowers in favor of the
Lender;
(iii) copies of the respective partnership agreements and all other
organizational documents of the Borrowers as in effect on the date hereof
certified by the general partners of the Borrowers;
(iv) copies of the respective written actions taken by the Borrowers to
authorize the execution, delivery and performance of the Loan Documents to which
the Borrowers are parties and the Borrowings under this Loan and Security
Agreement certified by the general partners of the Borrowers;
(v) certificates of incumbency and specimen signatures with respect to each
of the officers of the Borrowers who are authorized to execute and deliver the
Loan Documents to which the Borrowers are parties;
(vi) copies of each of the policies of insurance covering any of the
Collateral, together with loss payable clauses which comply with the terms of
Section 7.03;
(vii) a Notice of Borrowing from the Borrowers to the Lender requesting
the initial Loans and specifying the method of disbursement in the form attached
hereto as Exhibit E;
----------
(viii) a legal description of each parcel of real property upon which any
Collateral is located;
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(ix) the Guaranty duly executed and delivered by Jack Ritter and Nancy
Ritter in the form attached hereto as Exhibit F;
----------
(x) the Financing Statements, duly executed and delivered by the Borrowers
and the Guarantors, as the case may be;
(xi) with respect to borrowing pursuant to the Interim Financing Order, the
entry of the Interim Financing Order, the form and substance of which shall be
acceptable to the Lender in its sole and absolute discretion, on the docket of
the Bankruptcy Court and the approval by the Court of the Budget and the Supply
Agreement; and with respect to borrowing pursuant to the Final Order, the entry
of the Final Order on the Court's docket within 60 days of the entry on the
docket of the Interim Financing Order, the form and substance of which shall be
acceptable to the Lender in its sole and absolute discretion; and
(xii) such other documents and instruments as the Lender may reasonably
request.
(b) In addition, the obligation of the Lender to make the initial Loan is
subject to the condition that the Lender shall have received each of the
following, each of which shall be satisfactory in form and substance to the
Lender:
(i) The Interim Order shall have been entered on no less than 2-days' prior
notice to parties of interest in the Case (it being agreed that the giving of
notice to counsel for the Committee, the list of the 20 largest unsecured
creditors filed pursuant to Bankruptcy Rule 1007(d), the persons who have
requested notices given in the case pursuant to Bankruptcy Rule 2002 and the
United States Trustee for the Eastern District of Tennessee constitutes
sufficient notice), approving the transactions contemplated herein and granting
the Super-Priority Claim status and liens contemplated herein, which Interim
Order shall have authorized extensions of credit on an emergency basis and shall
not have been reversed, modified, amended or stayed; and
(ii) Except to the extent authorized by the Interim Order, the Court shall
have entered the Final Order, and the Interim Order or the Final Order, as the
case may be, shall be in full force and effect, and shall not have been
reversed, modified, amended or stayed.
Section 4.02. Conditions Precedent to Subsequent Loans.
-----------------------------------------
(a) Documentation sufficient, in the sole discretion of the Lender, to
substantiate the Consolidated Net Operating Profits (Losses) of the Borrowers
for the calendar month immediately preceding the calendar month in which a Loan
is to be made; and
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(b) such other documents and instruments as the Lender may reasonably
request.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
------------------------------
Section 5.01. Representations and Warranties. Each of the Borrowers
-------------------------------
represents and warrants to the Lender as follows:
(a) Organization; Power; Qualification. Each of the Borrowers is a
-----------------------------------
partnership, duly organized, validly existing and in good standing under the
laws of the State of Tennessee, has the power and authority to own its
properties and to carry on its business as now being and hereafter proposed to
be conducted and is duly qualified and authorized to do business in each
jurisdiction in which the character of its properties or the nature of its
business requires such qualification or authorization.
(b) Subsidiaries. The Borrowers have no Subsidiaries.
-------------
(c) Authorization of Loan Documents and Borrowings/Compliance With
--------------------------------------------------------------
Laws/Contravention With Other Documents. The Borrowers have the right and
- ----------------------------------------
power, and have taken all necessary action to authorize them, to borrow
hereunder and to execute, deliver and perform the Loan Documents to which they
are parties in accordance with their respective terms. The Loan Documents to
which the Borrowers are parties have been duly executed and delivered by the
duly authorized officers of the Borrowers, and each is a legal, valid and
binding obligation of the Borrowers enforceable in accordance with its terms.
The Borrowers are in compliance with all Applicable Laws binding upon them and
their respective properties. The execution and delivery by the Borrowers of the
Loan Documents to which they are parties do not require any Governmental
Approval and do not conflict with, and will not result in a breach of, any
contract, agreement or other document or instrument to which the Borrowers are
parties or with the partnership agreements and other organizational documents of
the Borrowers.
(d) Liens. None of the properties and assets of the Borrowers is, as of
------
the Agreement Date, subject to any Lien, other than Permitted Liens.
(e) Litigation. There are no actions, suits or proceedings pending (nor,
-----------
to the knowledge of the Borrowers, threatened) against or in any other way
relating adversely to or affecting the Borrowers, other than the Case and the
Pending Litigation.
(f) Tax Returns and Payments/Filings. All federal, state and other taxes,
---------------------------------
assessments and other governmental charges or levies upon the Borrowers and
their respective properties, income, profits and assets which are due and
payable have been paid, other than Existing Tax Obligations.
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(g) Financial Statements. Any and all U.S. Trustee Operating Reports filed
---------------------
with the Bankruptcy Court and delivered to the U.S. Trustee on or after the date
hereof are complete and correct and present fairly the financial position of the
Borrowers as at the respective dates thereof. The Borrowers have good title to
their respective properties and assets as reflected on each of the U.S. Trustee
Operating Reports.
(h) Hazardous Materials. There has been no production, disposal or storage
-------------------
on any of the properties of the Borrowers of any Hazardous Materials or any
activity which could have produced hazardous materials or toxic effects on
humans, flora or fauna, and there is no proceeding or inquiry by any
governmental agency or any proceeding filed in any court with respect thereto.
The Borrowers are not in violation of any federal, state or local laws, rules or
ordinances for environmental protection, including, but not limited to, the
Federal Clean Air Act; the Federal Clean Water Act; the Resource Conservation
and Recovery Act; Comprehensive Environmental Response, Compensation and
Liability Act; the National Environmental Policy Act; and the regulations of the
Environmental Protection Agency.
(i) Chief Executive Office/Location of Collateral/Trade Names and
-------------------------------------------------------------
Trademarks.
- -----------
(i) (A) The principal place of business and chief executive office of
Ritter Farms is located at Route 1, Box 1850, Bean Station, Grainger County,
Tennessee 37708; and
(B) the principal place of business and chief executive office of
GCTC is located at Route 1, Box 1850, Bean Station, Grainger County, Tennessee
37708.
(ii) During such five year period, the Borrowers have not changed their
respective names, identities or structures.
(iii) (A) All Inventory, Equipment and Farm Products of Ritter Farms is
located at Route 1, Box 1850, Bean Station, Grainger County, Tennessee 37708;
and
(B) all Inventory, Equipment and Farm Products of Ritter Farms is located
at Route 1, Box 1850, Bean Station, Grainger County, Tennessee 37708.
(iv) (A) Ritter Farms does not have, whether registered or not, or use
any trade names or trademarks; and
(B) GCTC does not have, whether registered or not, or use any trade
names or trademarks.
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ARTICLE VI
SECURITY INTEREST
-----------------
Section 6.01. Security Interest. As security for the prompt payment in
-----------------
full of all of the Secured Obligations, pursuant to Section 364(c)(2) and (c)(3)
of the Bankruptcy Code (and the Orders) the Borrowers hereby pledge and grant to
the Lender a continuing general lien upon and security interest in all of the
Collateral, and in addition, the Lender shall be entitled to a Super-Priority
Claim pursuant to the Orders. No claim shall be equal or senior to such Super-
Priority Claim in favor of the Lender and no Lien shall be equal to or senior to
such lien in favor of the Lender in the Collateral, except for the Prior Liens.
So long as an Event of Default shall not have occurred, the Borrowers shall be
permitted to pay administrative expenses of the kind specified in Section 503(b)
of the Bankruptcy Code incurred in the ordinary course of business of the
Borrowers, and compensation and reimbursement of expenses allowed and payable
under Sections 330 and 331 of the Bankruptcy Code, as the same may be due and
payable and the same shall not reduce the Carve-Out, whether paid prior or
subsequent to the occurrence of an Event of Default. Moreover, any pre-petition
retainers held by the professionals shall not reduce the Carve-Out.
Section 6.02. Continued Priority of Security Interest/Further Assurances.
------------------------------------------------------------
The Borrowers shall cause the Security Interest granted by the Borrowers to be
at all times a valid and perfected Lien and enforceable against the Borrowers,
the Collateral and all third parties, in accordance with the terms of this Loan
and Security Agreement and the Collateral shall not at any time be subject to
any Liens other than Permitted Liens. In this connection, the Borrowers shall,
at its sole cost and expense, take all action that may be necessary or
desirable, as determined by the Lender, so as at all times to maintain the
validity, perfection and enforceability of the Security Interest or to enable
the Lender to exercise or enforce its rights hereunder. Such action may
include, but shall not be limited to: (i) paying all taxes, assessments and
other claims levied or assessed on any of the Collateral; (ii) obtaining
landlords', mortgagees' or mechanics' releases, subordinations or waivers with
respect to the Collateral, in such form as may be satisfactory to the Lender;
and (iii) executing and delivering financing statements, pledges, designations,
mortgages, deeds to secure debt, deeds of trust, hypothecations, notices and
assignments, in each case in form and substance satisfactory to the Lender,
relating to the creation, validity, perfection, maintenance or continuation of
the Security Interest under the Uniform Commercial Code or other Applicable Law.
ARTICLE VII
COLLATERAL COVENANTS
--------------------
For so long as any of the Secured Obligations remain unpaid or unperformed
or this Loan and Security Agreement is in effect:
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Section 7.01. Collection of Receivables. The Borrowers will cause all
-------------------------
moneys, checks, notes, drafts and other payments relating to or constituting
proceeds of Receivables, or of any other Collateral, to be deposited in the
Blocked Account, the activity with respect to which, including but not limited
to any withdrawal or transfer of funds therefrom, shall be governed by the terms
and conditions of the Blocked Account Letter.
Section 7.02. Delivery of Instruments. In the event any Receivable
------------------------
becomes evidenced by a promissory note, trade acceptance or any other instrument
for the payment of money, the Borrowers will immediately thereafter deliver such
instrument to the Lender, appropriately endorsed to the Lender.
Section 7.03. Insurance. The Borrowers shall at all times maintain
----------
insurance on the Collateral against loss or damage by fire, theft, burglary,
pilferage, loss in transit and such other hazards as the Lender shall reasonably
specify, in amounts and under policies issued by present insurers of the
Borrowers or other insurers acceptable to the Lender; provided, however, the
Lender hereby acknowledges that the insurance maintained by the Borrowers on any
growing crops shall insure only against damage by hail. All insurance policies
required under this Section 7.03 shall contain loss payable clauses on New York
standard loss payee forms that are in form and substance satisfactory to the
Lender which, among other things, provide that all insurance proceeds be
distributed to the Lender. Any proceeds of insurance paid to the Lender shall
be applied to the payment or prepayment of the Secured Obligations.
Section 7.04. Location of Offices and Collateral/Change of Name. The
--------------------------------------------------
Borrowers shall not change their respective principal places of business or
chief executive offices without giving the Lender thirty days' prior written
notice. The Borrowers shall keep all Inventory and Farm Products (other than
Inventory and, as appropriate, Farm Products in transit) and all Equipment at
the location or locations set forth in Section 5.01(i)(iii) hereof and shall not
remove such Inventory, Farm Products or Equipment to another location without
giving the Lender thirty days' prior written notice. The Borrowers shall not
change their respective legal names without thirty days' prior written notice to
the Lender. The Borrowers shall give the Lender thirty days' prior written
notice before they use any trade name or trademark (other than those set forth
in Section 5.01(i)(iv) hereof) in connection with their business operations.
Section 7.05. Power of Attorney. The Borrowers hereby irrevocably
------------------
designate, make, constitute and appoint the Lender (and all Persons designated
by the Lender from time to time) as the true and lawful attorney and agent in
fact of the Borrowers, and the Lender, or any agent of the Lender, may, without
notice to the Borrowers, and at such time or times after the occurrence of an
Event of Default as the Lender or any such agent in its sole discretion may
determine, in the name of the Borrowers or the Lender, carry out any of the
following: (a) to endorse the name of the Borrowers on any checks, notes,
acceptances, money orders, drafts or other forms of payment or security that may
come into the Lender's possession and on any chattel paper, document, freight
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bill or other document or instrument relating to any Receivables, Inventory,
Farm Products or other Collateral; (b) to sign the name of the Borrowers on any
invoice or bill of lading relating to any Receivables, Inventory, Farm Products
or other Collateral, on any drafts against customers related to letters of
credit, on schedules and assignments of Receivables furnished to the Lender by
the Borrowers, on notices of assignment, financing statements and other public
records relating to the perfection or priority of the Security Interest, on
verifications of account and on notices to or from customers; (c) to demand
payment of the Receivables from an Account Debtor; (d) to enforce payment of the
Receivables by legal proceedings or otherwise; (e) to exercise all of the rights
and remedies of the Borrowers with respect to the collection of Receivables; (f)
to settle, adjust, compromise, extend or renew any or all of the Receivables;
(g) to settle, adjust or compromise any legal proceedings brought to collect the
Receivables; (h) to use the stationery of the Borrowers and sign the name of the
Borrowers to verifications of the Receivables and on any notice to the Account
Debtors; (i) to open the mail of the Borrowers to effectuate the collection of
Receivables; (j) to notify the post office authorities to change the address for
delivery of the mail of the Borrowers to an address designated by the Lender;
(k) to use all computer programs, tapes, disks, other computer software and the
information recorded on or contained in any data processing equipment and
computer hardware relating to any Account Debtor, the Receivables, Inventory,
Farm Products or other Collateral to which the Borrowers have access; and (l)
take any and all other actions necessary to effectuate the collection of the
Receivables or carry out the transactions contemplated hereby. This power-of-
attorney shall be irrevocable and shall be coupled with an interest and all acts
taken by the Lender pursuant to this power-of-attorney are hereby ratified and
approved by the Borrowers.
Section 7.06. Payments Directly to Lender. The Lender may at any time and
---------------------------
from time to time after the occurrence of an Event of Default notify, or request
the Borrowers to notify, in writing or otherwise, any Account Debtor or other
obligor with respect to any one or more of the Receivables to make payment to
the Lender or any agent or designee of the Lender directly, at such address as
may be specified by the Lender.
Section 7.07. Client Disputes. The Lender shall have the right (but not
----------------
the obligation) at all times after the occurrence of an Event of Default to
settle, compromise, adjust, or litigate all disputes directly with the Account
Debtor or other complainant upon such terms and conditions as the Lender shall
deem advisable without incurring any liability to the Borrowers for any such
acts.
ARTICLE VIII
AFFIRMATIVE COVENANTS
---------------------
For so long as any of the Secured Obligations remains unpaid or
unperformed, or this Loan and Security Agreement is in effect, the Borrowers
shall:
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Section 8.01. Preservation of Existence and Similar Matters. Preserve and
----------------------------------------------
maintain their respective legal existence, rights, licenses and privileges in
the jurisdiction of their organization and qualify and remain qualified as a
foreign entity and authorized to do business in each jurisdiction in which the
character of its properties or the nature of its businesses require such
qualification or authorization.
Section 8.02. Compliance With Applicable Law. Comply with all Applicable
-------------------------------
Law, including the obtaining of all Governmental Approvals.
Section 8.03. Maintenance of Property/Conduct of Business. In addition
--------------------------------------------
to, and not in derogation of, the requirements of any of the Loan Documents to
which the Borrowers are parties, protect and preserve all their respective
properties, and maintain in good repair, working order and condition all of its
respective tangible properties. The Borrowers shall engage only in businesses
in substantially the same field as the businesses conducted by the Borrowers on
the date hereof.
Section 8.04. Payment of Taxes and Claims. Pay or discharge when due:
----------------------------
(a) all taxes, assessments and governmental charges or levies imposed upon them
or upon any properties belonging to the Borrowers and (b) all lawful claims of
materialmen, mechanics, carriers, warehousemen and landlords for labor,
materials, supplies and rentals which, if unpaid, might become a Lien on any
properties of the Borrowers; provided, however, that neither this Section 8.04
nor any other provision of this Loan and Security Agreement shall require the
payment of any of the Existing Tax Obligations.
Section 8.05. Use of Proceeds. Use the proceeds of all Loans only for (i)
---------------
general business and working capital purposes and only in the business of the
Borrowers as currently being conducted and (ii) all other purposes mandated, and
payments ordered, by the Bankruptcy Court.
Section 8.06. Inspection of Books, Records, Properties. Allow the Lender,
-----------------------------------------
during normal business hours of the Borrowers, to inspect the books, records and
properties of the Borrowers and to discuss the business and financial affairs of
the Borrowers with representatives of the Borrowers.
ARTICLE IX
INFORMATION
-----------
For so long as any of the Secured Obligations remains unpaid or
unperformed, or this Loan and Security Agreement is in effect, the Borrowers
will furnish to the Lender and its counsel:
Section 9.01. Filings, Pleadings and Reports. All pleadings, motions
------------------------------
applications, judicial information, financial information, and other documents
(excluding routine correspondence) filed by or on behalf of the Borrowers with
the Bankruptcy Court or distributed to the Committee.
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<PAGE>
Section 9.02. Other Information/Litigation. Such other information with
----------------------------
respect to the Collateral and the business operations or financial condition of
the Borrowers, including but not limited to, physical listings of Inventory,
Farm Products and Equipment, as the Lender may reasonably request. The
Borrowers also shall give prompt notice of any action, suits, claims or
proceedings that are instituted against the Borrowers or the Guarantors or of
the occurrence of any Event of Default.
ARTICLE X
NEGATIVE COVENANTS
------------------
So long as any of the Secured Obligations remain unpaid or unperformed, or
this Loan and Security Agreement is in effect, neither of the Borrowers shall,
directly or indirectly, without the prior written consent of the Lender:
Section 10.01. Indebtedness for Borrowed Money. Obtain any loans,
-------------------------------
advances or other financial accommodations or arrangements or otherwise incur
any other indebtedness for money borrowed or for the deferred purchase price of
any asset (including capitalized lease obligations) from any other Person other
than the Lender.
Section 10.02. Guaranties. Assume, guarantee, endorse or otherwise become
----------
directly or contingently liable in connection with any Indebtedness of any other
Person other than guaranties from time to time existing in favor of the Lender.
Section 10.03. Investments. Make any investments in any Person or
------------
purchase or otherwise acquire any capital stock, properties, substantially all
the assets or obligations of, or any other equity interest in, any Person.
Section 10.04. Capital Expenditures. Make or incur capital expenditures
---------------------
(as such expenditures are characterized under generally accepted accounting
principles) in excess of $1,000, in the aggregate, in any fiscal year of the
Borrowers. Notwithstanding the immediately preceding sentence of this Section
10.04, the Borrowers may make capital expenditures at any time in an aggregate
amount not to exceed $10,000 solely for the purpose of constructing a barge to
be used by the Borrowers to farm tomatoes growing on an island, as previously
more particularly disclosed to the Lender.
Section 10.05. Liens. Create, assume, incur or suffer to exist any Lien
-----
upon any of its respective properties or assets whether now owned or hereafter
acquired, other than Permitted Liens.
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Section 10.06. Distributions. Declare or pay any distributions, return
-------------
any capital to its partners as such or make any other payment or distribution of
assets to its partners with respect to capital.
Section 10.07. Merger, Consolidation and Sale of Assets. Merge or
----------------------------------------
consolidate with any other Person or sell, lease or transfer or otherwise
dispose of all or a substantial portion of its assets to any Person.
Section 10.08. Transactions With Affiliates. Effect any transaction with
----------------------------
any Affiliate by which any of the assets of the Borrowers are transferred to
such Affiliate at less than the cost or fair market value of such asset, or
enter into any other transaction with an Affiliate on terms more favorable to
such Affiliate than would be reasonably expected to be given in a similar
transaction with an unrelated entity.
Section 10.09. Loans. Extend credit to or make any advance, loan,
-----
contribution or payment of money or goods (other than normal compensation for
personal services and travel expenses in the ordinary course of business) to any
Person.
Section 10.10. Subsidiaries. Create, incorporate or acquire any
------------
Subsidiary.
Section 10.11. Super-Priority Claims. Create or permit to exist any other
---------------------
Super-Priority Claim, which is pari passu with or senior to the claims of the
Lender, other than the Prior Liens.
Section 10.12. Payments on Account of Reclamation Claims. Agree or seek
-----------------------------------------
authority of the Bankruptcy Court to make any payments or transfer any property
on account of reclamation claims asserted by the vendors of the Borrowers, other
than payments made pursuant to Bankruptcy Court authority in an aggregate amount
not in excess of $1,000.
ARTICLE XI
DEFAULT
-------
Section 11.01. Events of Default. Each of the following shall constitute
-----------------
an Event of Default:
(a) Default in Payment. The Borrowers shall fail to pay the principal of,
------------------
or interest on, any of the Loans or any of the other Secured Obligations, when
and as due (whether upon demand, at maturity, by reason of acceleration or
otherwise).
(b) Misrepresentations. Any statement, representation or warranty made by
------------------
the Borrowers under or pursuant to any Loan Document to which the Borrowers are
parties or in any other writing or statement at any time furnished or made by
the Borrowers to the Lender (including any schedule of Receivables or Inventory
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delivered to the Borrowers) shall at any time prove to have been incorrect or
misleading in any material respect when furnished or made.
(c) Default in Performance. The Borrowers shall fail to perform or observe
----------------------
any other term, covenant, condition or agreement contained in this Loan and
Security Agreement or in any other Loan Document to which the Borrowers are
parties, or in any other agreement between the Borrowers and the Lender not
elsewhere mentioned in this Section 11.01.
(d) Judgment. A judgment or order for the payment of money shall be
--------
entered against the Borrowers or the Guarantors by any court or tribunal which
exceeds $10,000 in amount.
(e) Ownership/Management. The Guarantors shall at any time have an
--------------------
aggregate interest in each of the Borrowers of less than one-hundred percent
(100%).
(f) Loss of Collateral. There shall occur any material uninsured loss or
------------------
material reduction in value of the Collateral.
(g) Material Adverse Change. The occurrence of any event or change which
-----------------------
gives rise to a material adverse change in the financial condition or business
operations of the Borrowers.
(h) Misappropriation of Receivables Proceeds. The misappropriation by the
----------------------------------------
Borrowers or any employee thereof of any proceeds of any Receivables and/or the
failure of the Borrowers to otherwise cause the proceeds of any Receivables to
be deposited into the Blocked Account.
(i) Dismissal or Conversion of the Case. The Case shall be dismissed or
-----------------------------------
converted to a Chapter 7 Case; a Chapter 11 Trustee or an examiner with expanded
powers shall be appointed in the Case (other than as a result of a finding of
fraud, dishonesty or mismanagement on the part of the management of the
Borrowers); any other Super-Priority Claim which is pari passu with or senior to
the claims of the Lender shall be granted in the Case, other than the Prior
Liens.
(j) Payment of Pre-Petition Indebtedness. Except with the prior written
------------------------------------
consent of the Lender, the Borrowers shall agree or seek authority of the
Bankruptcy Court to make any payment (by way of adequate protection or
otherwise) of principal or interest or otherwise on account of any pre-petition
indebtedness (excluding rental payments on real property leases as required by
the Bankruptcy Code) or trade payables arising from the purchase and pre-
petition receipt of Inventory or Farm Products not otherwise permitted to be
paid under this Loan and Security Agreement (with such exceptions relating to
indebtedness other than on account of borrowed money as may be satisfactory to
the Lender); provided that under an asset sale conducted in accordance with the
terms of this Loan and Security Agreement, the payment by the Borrowers of the
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proceeds thereof to the holders of Prior Liens thereon subject to the entry of
an order of the Bankruptcy Court authorizing such payment shall not constitute
an Event of Default.
(k) Relief From the Automatic Stay. The Bankruptcy Court shall enter an
------------------------------
order granting relief from the automatic stay to the holder or holders of any
security interest to permit foreclosure (or the granting of a deed in lieu of
foreclosure or the like) in any assets of the Borrowers which are used or held
for use in the operations of the Borrowers, if the amount of indebtedness
involved exceeds $15,000.
(l) Modification of the Orders. An order shall be entered reversing,
--------------------------
amending, supplementing, staying for a period in excess of 10 days, vacating or
otherwise modifying the Interim Order or the Final Order.
Section 11.02. Remedies. Upon the occurrence of an Event of Default, the
--------
Lender may exercise any or all of the following rights and remedies:
(a) Acceleration. If any Event of Default shall have occurred and be
------------
continuing, the Lender may: (i) declare the principal of, and accrued but
unpaid interest on, the Loans and the Note at the time outstanding, and all of
the other Secured Obligations, to be forthwith immediately due and payable,
whereupon the same shall immediately become due and payable without presentment,
demand, protest or other notice of any kind, all of which are expressly waived,
anything in any Loan Document or any other agreement evidencing any Secured
Obligations to the contrary notwithstanding and (ii) terminate this Loan and
Security Agreement and the making of Loans hereunder; provided, however, that if
an Event of Default set forth in Section 11.01(i), (j), (k) or (l) hereof shall
have occurred, all of the principal of, and accrued but unpaid interest on, the
Loans and all other Secured Obligations shall become automatically due and
payable and this Loan and Security Agreement and the making of Loans shall
automatically terminate.
(b) Inventory, Farm Products and Equipment.
---------------------------------------
(i) Entry. The Lender may enter upon any premises in which Inventory,
-----
Farm Products or Equipment may be located and, without resistance or
interference by the Borrowers, take physical possession of any or all thereof
and maintain such possession on such premises or move the same or any part
thereof to such other place or places as the Lender shall choose, without being
liable to the Borrowers on account of any loss, damage or depreciation that may
occur as a result thereof, other than for actions that were not taken in good
faith.
(ii) Assembly. The Borrowers shall, upon request of and without charge to
--------
the Lender, assemble the Inventory, Farm Products and Equipment and maintain or
deliver it into the possession of the Lender or any agent or representative of
the Lender at such place or places as the Lender may designate and as are
reasonably convenient to both the Lender and the Borrowers.
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(iii) Warehousing. The Lender may, at the expense of the Borrowers, cause
-----------
any of the Inventory, Farm Products and Equipment to be placed in a public or
field warehouse, and the Lender shall not be liable to the Borrowers on account
of any loss, damage or depreciation that may occur as a result thereof, other
than for actions that were not taken in good faith.
(c) Rights as a Secured Creditor. The Lender may exercise all of the
----------------------------
rights and remedies of a secured party under the Uniform Commercial Code and
under any other Applicable Law with respect to all or any portion of the
Collateral, including but not limited to, the right, without notice except as
specified below and with or without taking possession thereof, to sell the
Collateral or any part thereof in one or more parcels at public or private sale
at any location chosen by the Lender, for cash, on credit or for future
delivery, and at such price or prices and upon such other terms as the Lender
may deem commercially reasonable. The Borrowers agree that, to the extent
notice of sale shall be required by law, at least ten days' notice to the
Borrowers of the time and place of any public sale or the time after which any
private sale is to be made shall constitute reasonable notification, but notice
given in any other reasonable manner or at any other reasonable time shall
constitute reasonable notification. The Lender shall not be obligated to make
any sale of Collateral regardless of notice of sale having been given. The
Lender may adjourn any public or private sale from time to time by announcement
at the time and place fixed therefor, and such sale may, without further notice,
be made at the time and place to which it was so adjourned.
Section 11.03. Application of Proceeds. All proceeds from each sale of,
-----------------------
or other realization upon, all or any part of the Collateral following an Event
of Default shall be applied or paid over as follows: (a) First: to the payment
of all costs and expenses incurred in connection with such sale or other
realization, including but not limited to, reasonable attorneys' fees if the
Lender endeavored to collect the Secured Obligations by or through an attorney
at law; (b) Second: to the payment of the interest due upon any of the Secured
Obligations, in any order which the Lender may elect; (c) Third: to the payment
of the principal due upon any of the Secured Obligations in any order which the
Lender may elect; and (d) Fourth: the balance (if any) of such proceeds shall
be paid to the Borrowers subject to any duty imposed by law or otherwise to the
holder of any subordinate Lien in the Collateral known to the Lender and subject
to the direction of a court of competent jurisdiction.
The Borrowers shall remain liable and shall pay, on demand, any deficiency
remaining in respect of the Secured Obligations, together with interest thereon
at a rate per annum equal to the highest rate then payable hereunder on such
Secured Obligations, which interest shall constitute part of the Secured
Obligations.
Section 11.04. Rights Cumulative. The rights and remedies of the Lender
-----------------
under the Loan Documents shall be cumulative and not exclusive of any rights or
remedies which it would otherwise have. In exercising its rights and remedies
the Lender may be selective and no failure or delay by the Lender in exercising
any right shall operate as a waiver of it, nor shall any single or partial
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<PAGE>
exercise of any power or right preclude its other or further exercise or the
exercise of any other power or right.
ARTICLE XII
MISCELLANEOUS
-------------
Section 12.01. Notices. Unless otherwise provided herein, communications
-------
provided for hereunder shall be in writing and shall be mailed, telecopied or
delivered, if to the Borrowers at their address at Route 1, Box 1850, Bean
Station, Tennessee 37708, with a copy to W. Morris Kizer, Esq., Gentry, Tipton,
Kizer & McLemore, P.C., 2610 First Tennessee Plaza, Knoxville, Tennessee 37929,
telecopy number (423) 523-7315; and F. Scott Milligan, Esq., Suite 130, 900 East
Hill Avenue, Knoxville, Tennessee 37915, telecopy number (423-522-7565; if to
the Lender, at its address at 1180 Upper Hembree Road, Roswell, Georgia 30308,
telecopy number (770) 664-4920, Attn: Harry Blazer, with a copy to Alston &
Bird LLP, One Atlantic Center, 1201 West Peachtree Street, Atlanta, Georgia
30309-3424, Attn: Bernard L. Greer, Jr., Esq., telecopy number (404) 881-7777;
or, as to each party, at such other address as shall be designated by such party
in a written notice to the other parties. All such notices and other
communications to the Borrowers shall be effective (i) if mailed, when received
or three days after mailing, whichever is earlier; (ii) if telecopied, when
transmitted; or (iii) if hand delivered, when delivered. All such notices or
communications to the Lender shall be effective when actually received.
Section 12.02. Expenses. Subject to the provisions of the Interim and the
--------
Final Order, the Borrowers will pay all out-of-pocket expenses incurred by the
Lender in connection with: (a) the negotiation, preparation, execution,
delivery and administration of the Loan Documents, whenever the same shall be
executed and delivered, including appraisers' fees, title insurance fees, search
fees, recording fees, intangibles and stamp taxes payable by the Lender with
respect to the Loan Documents and the fees and disbursements of Alston & Bird
LLP, counsel for the Lender and of each local counsel retained by the Lender;
(b) the restructuring, refinancing or "workout" of the transactions contemplated
hereby, and the preparation, negotiation, execution and delivery of any waiver,
amendment or consent by the Lender relating to the Loan Documents, including but
not limited to, the fees, out-of-pocket expenses and other disbursements of
counsel to the Lender; (c) the collection or enforcement of the Loan Documents
or the Secured Obligations including the reasonable fees and disbursements of
counsel to the Lender if such collection or enforcement is done through or by an
attorney; and (d) the exercise by the Lender of any right or remedy granted to
it under any Loan Document whether or not an Event of Default has occurred,
including but not limited to, the expenses incurred by the Lender in connection
with the collection of Receivables directly from Account Debtors.
Section 12.03. Litigation. (a) THE LENDER AND THE BORROWERS BOTH
----------
ACKNOWLEDGE AND AGREE THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS LOAN AND
-23-
<PAGE>
SECURITY AGREEMENT OR THE OTHER LOAN DOCUMENTS OR THE RELATIONSHIP OF THE
BORROWERS AND THE LENDER ESTABLISHED HEREBY AND THEREBY WOULD BE BASED UPON
DIFFICULT AND COMPLEX ISSUES. ACCORDINGLY, EACH OF THE LENDER AND THE BORROWERS
HEREBY WAIVES ITS RESPECTIVE RIGHT TO A TRIAL BY JURY IN ANY ACTION OR
PROCEEDING OF ANY KIND OR NATURE IN ANY COURT OR TRIBUNAL IN WHICH AN ACTION MAY
BE COMMENCED BY OR AGAINST THE BORROWERS OR THE LENDER ARISING OUT OF ANY LOAN
DOCUMENT, THE SECURED OBLIGATIONS OR ANY OTHER DOCUMENT EXECUTED AND DELIVERED
IN CONNECTION HEREWITH OR THEREWITH OR IN CONNECTION WITH THE COLLATERAL OR ANY
ASSIGNMENT THEREOF OR BY REASON OF ANY OTHER CAUSE OR DISPUTE WHATSOEVER BETWEEN
THE BORROWERS AND LENDER OF ANY KIND OR NATURE.
(b) THE BORROWERS AND LENDER EACH HEREBY AGREE THAT THE FEDERAL COURT OF
THE EASTERN DISTRICT OF TENNESSEE SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND
DETERMINE ANY CLAIMS OR DISPUTES BETWEEN THE BORROWERS AND THE LENDER,
PERTAINING DIRECTLY OR INDIRECTLY TO THIS LOAN AND SECURITY AGREEMENT, THE NOTE,
ANY OTHER LOAN DOCUMENT OR TO ANY MATTER ARISING THEREFROM, THE COLLATERAL OR
ANY OTHER DOCUMENT EXECUTED AND DELIVERED IN CONNECTION HEREWITH OR THEREWITH.
THE BORROWERS EXPRESSLY SUBMIT AND CONSENT IN ADVANCE TO SUCH JURISDICTION IN
ANY ACTION OR PROCEEDING COMMENCED IN SUCH COURTS. THE EXCLUSIVE CHOICE OF
FORUM SET FORTH IN THIS PARAGRAPH SHALL NOT BE DEEMED TO PRECLUDE THE BRINGING
OF ANY ACTION BY THE LENDER OR THE ENFORCEMENT BY THE LENDER OF ANY JUDGMENT
OBTAINED IN SUCH FORUM IN ANY OTHER APPROPRIATE JURISDICTION.
(c) FURTHER, THE BORROWERS WAIVE (i) ANY NOTICE PRIOR TO THE TAKING
POSSESSION OR CONTROL OF THE COLLATERAL OR ANY POSTING OF ANY BOND OR SECURITY
WHICH MIGHT BE REQUIRED BY ANY COURT PRIOR TO ALLOWING THE LENDER TO EXERCISE
ANY OF LENDER'S REMEDIES SET FORTH HEREIN, INCLUDING THE ISSUANCE OF AN
IMMEDIATE WRIT OF POSSESSION AND (ii) THE BENEFIT OF ALL VALUATION, APPRAISEMENT
AND EXEMPTION LAWS. FURTHER, BORROWER HAS ACKNOWLEDGED THAT THERE ARE NO
CLAIMS, OTHER THAN ORDINARY COURSE OF BUSINESS CLAIMS WITH RESPECT TO THE
PURCHASE OF PRODUCE, AGAINST THE LENDER AND ACKNOWLEDGE THERE ARE NO RIGHTS SET
OFF AND HEREBY WAIVE, RELEASE AND REMISE ANY SUCH CLAIMS ARISING ON OR BEFORE
THE PETITION DATE OR ARISING BY VIRTUE OF THE FILING OF A BANKRUPTCY BY THE
BORROWERS
-24-
<PAGE>
(d) THE FOREGOING WAIVERS HAVE BEEN MADE WITH THE ADVICE OF COUNSEL AND
WITH A FULL UNDERSTANDING OF THE LEGAL CONSEQUENCES THEREOF.
Section 12.04. Amendments. Any term, covenant, agreement or condition of
----------
any Loan Document may be amended or waived if, but only if, such amendment or
waiver is in writing and is signed by the Lender and, in the case of an
amendment, by the Borrowers.
Section 12.05. Indemnification. The Borrowers agree to indemnify and hold
---------------
the Lender harmless from and against any claim, loss, damage, action, cause of
action, liability, cost and expense or suit of any kind or nature whatsoever,
brought against or incurred by the Lender, in any manner arising out of or,
directly or indirectly, related to or connected with the operation of the
business of the Borrowers, any action taken by the Lender with respect to any
Receivables pursuant to Articles VII and XI hereof or any other action taken by
the Lender pursuant to the terms of this Loan and Security Agreement, including
but not limited to, claims brought against the Lender by any Account Debtor or
any and all claims against the Lender with respect to any Hazardous Materials or
otherwise arising under any federal or state environmental statute, rule or
regulation, including, without limitation, the Superfund Act or the Federal
Resource Conservation and Recovery Act of 1976, as amended.
Section 12.06. Governing Law. THIS LOAN AND SECURITY AGREEMENT AND THE
-------------
LOAN DOCUMENTS SHALL BE CONSTRUED IN ACCORDANCE WITH, AND GOVERNED BY, THE LAWS
OF THE STATE OF GEORGIA.
Section 12.07. Integration. THIS LOAN AND SECURITY AGREEMENT, THE OTHER
-----------
LOAN DOCUMENTS AND THE ORDERS SET FORTH AND CONSTITUTE THE ENTIRE AGREEMENT
BETWEEN THE PARTIES HERETO WITH RESPECT TO THE TRANSACTIONS SET FORTH HEREIN AND
THEREIN AND THE CREDIT FACILITY DESCRIBED HEREBY.
Section 12.08. Counterparts. This Loan and Security Agreement may be
------------
executed in several counterparts, each of which shall be an original and all of
which, taken together, shall constitute but one and the same instrument.
[Signatures on following page]
-25-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Loan and Security
Agreement to be executed by their authorized officers all as of the day and year
first above written.
RITTER FARMS, A Tennessee Partnership
By: /S/ JACK RITTER
--------------------------
Name: Jack Ritter
-----------
Its general partner
GRAINGER COUNTY TOMATO
COMPANY, A Tennessee Partnership
By: /S/ JACK RITTER
--------------------------
Name: Jack Ritter
-----------
Its general partner
HARRY'S FARMERS MARKET, INC.,
a Georgia corporation
By: /S/ TERRY L. RANSOM
-------------------
Name: Terry L. Ransom
---------------
Title: CAO
---
-26-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10K FOR
PERIOD ENDED APRIL 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TOI
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-28-1998
<PERIOD-START> JAN-30-1997
<PERIOD-END> APR-30-1997
<CASH> 343,076
<SECURITIES> 0
<RECEIVABLES> 131,103
<ALLOWANCES> 25,000
<INVENTORY> 9,924,408
<CURRENT-ASSETS> 11,850,328
<PP&E> 66,830,539
<DEPRECIATION> 21,643,276
<TOTAL-ASSETS> 60,179,254
<CURRENT-LIABILITIES> 5,920,514
<BONDS> 14,195,858<F1>
10,323,765<F4>
0
<COMMON> 38,559,372
<OTHER-SE> (20,274,539)
<TOTAL-LIABILITY-AND-EQUITY> 60,179,254
<SALES> 34,003,785
<TOTAL-REVENUES> 34,003,785
<CGS> 25,069,521
<TOTAL-COSTS> 9,103,843
<OTHER-EXPENSES> (1,021,741)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 662,771<F2>
<INCOME-PRETAX> 852,162
<INCOME-TAX> 22,500
<INCOME-CONTINUING> 792,777<F3>
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 792,777
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.10
<FN>
<F1>SHORT TERM PORTION INCLUDED IN CURRENT LIABILITIES
<F2>INCLUDED IN OTHER EXPENSES
<F3>INCOME NET OF ACCRETION OF WARRANTS
<F4>MANDATORY REDEEMABLE FOR $11 MILLION
</FN>
</TABLE>
